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Author bio: Mihir Korke is Head of Acquisition at Clover Network, and provides today’s guest blog, ‘Do You Consider Price Optimization?’
Clover Network is a small business credit card processing and POS systems leader. Clover specializes in restaurant, retail, and personal and professional service payment solutions. With desktop and mobile POS systems, contactless payments, solutions for curbside pickup and online ordering, loyalty, and rewards, Clover has multiple solutions to meet your business’s needs.
“Pricing Facts: Data From Consumers,” Prisync, 1 November 2017
NOTE: All types of business, such as retail, corporate, and entrepreneurial endeavors, will do well to heed the suggestions in the article below.
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Charging higher prices allows you to keep more of every sale, but you may also sell fewer units. By contrast, reducing your prices shrinks your margins. Finding the right balance with a pricing optimization strategy can help you generate sales and improve your margins across the board.
The goal, of course, is to find the best pricing balance that helps optimize your profitability. Price optimization is even more critical if you sell to a diverse customer base across multiple channels such as in-person, online, via smartphone, or by email.
This guide outlines the benefits of pricing optimization – and how to design a strategy that works for your business.
Why It Matters To Consider Price Optimization
One of the most important benefits of optimizing prices is charging the maximum amount possible while reducing the risk of losing sales. In turn, doing so helps increase your retail store’s profitability.
Having a pricing optimization system in place offers two additional advantages:
- Improved accuracy: With price optimization, you can test changes to see their impact on sales. However, changing prices en masse is time-consuming. A lot of important data gets lost when making changes across the board. Having a system in place allows you to test pricing edits in discrete steps. You can scale up what works and abandon what doesn’t.
- Increased adaptability: Using a price optimization system can help make you nimbler – allowing you to respond to market conditions more quickly. Suppose you suddenly face an oversupply of Item X or a shortage of Widget Y. In that case, you can immediately adjust the prices of these items to help maximize sales (or minimize losses).
Let The Data Guide Your Pricing Decisions
The most basic approach to pricing optimization involves:
- Picking an item.
- Noting its past sales performance.
- Measuring what impact a price change could have on future sales.
This strategy involves a lot of guesswork, and it means you will have to repeat this process with every item in your inventory.
An effective price optimization strategy involves collecting volumes of hard and soft data to prioritize better which items and demographic groups to target. In addition to historical sales data, this collection should include the following:
- Customer Surveys
These can be quantitative surveys with close-ended questions and multiple choice answers. They can also be qualitative data with open-ended questions. These are harder to sort, but you can learn a lot about your customers’ pain points and preferences.
2. Your Internal Costs
Remember that profitability also depends on your costs. You have to factor in all the operational, development, and marketing expenses that go into acquiring and selling whatever inventory you carry. Together, these variable and fixed costs set a floor on how low you can set your prices.
3. The Competition
An estimated 86% of customers compare prices before buying from you. Unless you have a monopoly, you must be sensitive to what other retailers in your space are charging for similar products and services. In many instances, your competitors essentially set a ceiling on how high you can raise your prices.
Create A Price Optimization Checklist
Once you’ve collected sufficient data, you’re ready to design a price optimization system for your store. While every retailer is different, below are some of the essential steps to add to your checklist:
- Choose A Pilot Group
After analyzing any relevant survey, sales, and competitor data from the previous section, you should:
- Choose a test group within one of your target demographics (e.g., stay-at-home dads in a 50-mile radius)
- Select an item in your inventory that this target demographic group buys frequently (e.g., diapers)
- Hypothesize what impact a price change will have on that test group’s buying decisions (e.g., making diapers 10% cheaper will increase sales by 20% or more)
2. Test Your Hypothesis
The next step involves changing the item’s pricing and running promotions targeted for your test group. Remember that the simpler and more focused each test is, the cleaner the results. Mixing stay-at-home moms and dads, for example, could muddy the waters, even if both groups regularly shop at your store and buy diapers.
3. Analyze The Results
In the past, retailers had to analyze price optimization results manually. However, this approach can be challenging to implement – especially if you don’t have a tracking system to tag which sales come from which groups or channels.
Sifting through all this data is time-consuming – even when using spreadsheets, tables, and dedicated CRM software. Using a customer relationship management (CRM) platform or loyalty program can help. Both allow you to attach purchases and behaviors to individual customers to better source which pricing changes are impacting sales the most within your test group.
Fortunately, emerging artificial intelligence (AI) and machine learning technologies are helping to automate the analysis process – producing faster and more accurate results. Many of these AI tools are purpose-built for pricing optimization and can integrate seamlessly with existing payment environments.
Even when you find the best price to charge for a hot-selling item, be prepared to go through the optimization process multiple times. That’s because consumer preferences constantly change, and competitors rarely sit still. It’s best to view pricing optimization as an ongoing process rather than as a destination.
See our accompanying resource for additional tips on designing the right price optimization strategy for your retail business.
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